I like Capitalism, as the Christian Conservative that I am. But I do realize some people in Wall Street love money more than anything else and are not just willing, but ready to do anything under the sun for a quick gain – most times legally, but sometimes illegally.
Fox News host Tucker Carlson blasted billionaire Hedge Fund Manager Paul Singer last week, dedicating a segment of his program to an investigation of Hedge Funds and how they hurt middle America. Tucker explained how Hedge Fund companies exploit companies in what he called “vulture capitalism”. He said of Paul Singer:
“Elliott Management has made billions by buying large stakes in American companies, then firing workers, driving up short-term share prices, and in some cases taking government bailouts”.
Specifically, Tucker described the case of one particular town, Sidney, Nebraska, where a mega-sporting goods company, Cabela’s, has its headquarters. He explained how Singer pushed the company to sell, even though it had a profit of over $1 billion. He added:
“One year after Singer enters the equation, Bass Pro Shops announced the purchase of Cabela’s. The company’s stock price surged. Within a week, literally a week, Paul Singer cashed out” about $90 million profit upon exit. Nothing illegal about this, but the problem is, that in the process, some 2,000 employees lost their jobs, home prices collapsed and the town found itself with its people trapped in homes they couldn’t sell and no jobs for them.
The problem with Private Equity is that their focus is to make a quick buck. And in doing so, for the most part, they burden their portfolio companies with debt they cannot afford. Typically, Private Equity (PE) firms or Hedge Funds borrow money to purchase their assets, but rather than showing these debts in their respective financial statements, it’s the company they buy that shows that debt – and in so doing, it’s responsible for actually paying off such debt, interest and all.
Normally, these portfolio companies do not have the financial muscle to afford the quarterly interest payment and the only way to make such payments is to reduce costs. Since labor is the easiest way to do it, companies end up laying off hundreds or thousands of people. You would think at least this should allow the company to grow and, eventually, be sold such that the PE firm or Hedge Fund can exit the investment with a profit. However, that’s rare because the minute they start eliminating jobs, they choke operations. And when they choke operations the company cannot produce, ship and cash in as much as before. So their growth is limited or negative.
When this happens, PE firms replace the leadership team of the acquired company after “their” failure to produce the financial results the Singers of the world are expecting. Over time, they replace those teams over and over until they find a way out of the investment. Singer, in this particular case, only stayed in the investment for one year, which tells me he probably found a “bigger fool” to purchase his asset quite quickly. But in some cases these investors keep their investments for years until they find a bigger fool.
A bigger fool, in the investment world, means someone (like the public through the stock market) who’s dumb enough to buy a now crippled company at a higher price than what it’s worth. Some of these investments may show up in your 401 (k) if the manager managing your account decides to buy shares of these failing companies. In this case, Singer would think of you as the bigger fool.
If the Hedge Funds or Private Equity firms can take the company public (like what they tried to do with WeWork recently, for example), the bigger fool is the public (maybe you through your 401 (k)?) to whom these vulture investors sell their crappy companies.
Typically these “investors” known as Hedge Fund Managers or Private Equity Firms try to tell the public that what they’re doing is create value. And this is true – except the only ones to benefit are the Hedge Fund or Private Equity managers themselves.
You see, these deals are nothing but a transfer of wealth from the portfolio company’s employees and the “bigger fools” to the fund managers. The only way these fund managers earn money is by a) laying off people and b) finding a bigger fool to sell their overvalued assets to.
The question I ask is this: at which point does a transaction such as this become FRAUD?
I suppose the answer lies in whether or not there is an intent to destroy the operations of the company and benefit in the process. Is this what Singer did? He bought a company that was doing OK financially, laid off 2,000 people thus hurting operations such that a year later he sold it to a bigger fool for a profit. Singer didn’t even stay in the investment long enough to care about “improving operations”, as many of these managers pretend to do. They’re Wall Street individuals, for crying out loud. What could they possibly know about operations?
I believe Fund Managers and Private Equity firms should be obligated to publish their financials just like public companies – and carry the debt they incur to buy these companies in their OWN Financial Statements. The damage they cause to entire small towns, the general public and employees is too big to ignore. I don’t like a lot of regulation, but no oversight of what these people are doing isn’t the answer either.
“And if you make a sale to your neighbor or buy from your neighbor, you shall not wrong one another.“
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